Italian premier Mario Monti attends a news conference during his meeting with Swiss President Eveline Widmer-Schlumpf at Rome's Palazzo Chigi Government office, Tuesday, June 12, 2012. World markets fluctuated Tuesday as uncertainty reigned over whether Europe's plan to rescue Spain's ailing banks would be enough to prevent the continent's debt crisis from infecting other economies, like Italy. Italy's government on Monday confirmed that the country's recession is deepening. The economy contracted at a quarterly rate of 0.8 percent in the first three months of the year, the worst contraction in three years and double Spain's rate.
AP

euro zone

A statue of Christopher Columbus with an extended hand is seen in front of a Spanish flag in central Madrid June 11, 2012. Spain faces supervision by international lenders after a bailout for its banks agreed at the weekend, EU and German officials said on Monday, contradicting Prime Minister Mariano Rajoy who had insisted the cash came without such strings.
Reuters

Europe

A postman walks pass a Santander's bank office in El Masnou, near Barcelona, June 11, 2012. Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros ($125 billion) to shore up its teetering banks and Madrid said it would specify precisely how much it needs once independent audits report in just over a week.
Reuters

euro zone

The troubles are so far along now that Alan Greenspan, once the world's top central banker, declared the “noble experiment” of the currency union a failure.

Global markets can expect further turmoil as Greece heads into a weekend election that could determine whether it remains a partner in the group. The Greek vote, which pits the pro- and anti-austerity forces against each other, is seen as a test of both the euro zone and its efforts to corral runaway debt with crippling cutbacks.

“We are now seeing this as an overall vote on Greece's continued desire to remain a part of the grand European monetary experiment,” sales trader Will Hedden of IG Index said of the election, which was called after the last vote left no clear winner despite the gains made by the anti-austerity camp.

“Opinion polls are still divided, but we are seeing a leaning towards a pro-bailout result in our own Greek election market,” Mr. Hedden said.

“Some are calling this the ‘biggest weekend since Lehman' and they may well be right, so it is understandable that caution, indecision and uncertainty are the buzzwords of the day.”

With markets already anxious over the Greek election, Moody's added fuel to the euro fire late Wednesday by cutting Spain's rating, to Baa3 from A3, in the wake of its weekend agreement for up to €100-billion ($129.3-billion) for its ailing banking system.

Warning it could cut further still, the agency said Spain's plans to borrow the money will “further increase the country's debt burden, which has risen dramatically since the onset of the financial crisis.”

It also cited the government's “very limited” access to markets and its “growing dependence” on the country's banks to buy its new bonds. They, in turn, get their funding from the European Central Bank.

“The Spanish economy's continued weakness makes the government's weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years,” Moody's added.

At a conference in Montreal, Mr. Greenspan, former chairman of the Federal Reserve Board, said the only solution to the crisis is a full political union.

Asked during a question period after his presentation if the European monetary union is a failure, Mr. Greenspan replied: “Has it failed? Yes it has failed. The question is what happens now, what do we do about it?

“You cannot continue doing what they're doing,” he said.

The expectation that the cultural differences between the euro zone countries would be erased, as the poorer southern countries became more like their richer northern cousins, has not been fulfilled, he said.

“What they [countries such as Spain, Italy, Portugal and Greece] are doing is borrowing money on northern Europe's credit card,” he said in reference to the huge deficits that have been accumulated in the poorer nations.

The turmoil in Europe is also casting a shadow over the United States, which itself is headed for another debt crisis, Mr. Greenspan warned, citing the inability of politicians to reach a compromise on urgent economic issues, as well as the troubles in Europe.

“We would be doing far better if we didn't have the pall of Europe hanging over us and frankly it's going to get worse before it gets better,” he said.

More Related to this Story

Next story

| Learn More

Discover content from The Globe and Mail that you might otherwise not have come across. Here we’ll provide you with fresh suggestions where we will continue to make even better ones as we get to know you better.

You can let us know if a suggestion is not to your liking by hitting the ‘’ close button to the right of the headline.

Restrictions

All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. Thomson Reuters is not liable for any errors or delays in Thomson Reuters content, or for any actions taken in reliance on such content. ‘Thomson Reuters’ and the Thomson Reuters logo are trademarks of Thomson Reuters and its affiliated companies.